Saturday, February 03, 2007

Watch out Exxon, Washington has an Eye on You
Is Wrigley’s Next?

$39.5 Billion. Bigger than the market caps of most publicly traded US companies. That’s what Exxon Mobil bottom lined in 2006. Many call it obscene. Others shake their fist in disgust that one corporation can earn so much taking advantage of the little guy, dependent on the company’s product for survival. Politicos in Washington use this in order to win votes, raising the ire of the grass roots with one-sided and often blind rhetoric.

Even USA Today, “McPaper”, put it this way in an article by Matt Krantz:
Consumers who wondered where some of the $3 a gallon they paid for gasoline this summer ended up might want to take a look at ExxonMobil’s bottom line.
That’s how these stories typically start. This one in particular goes on to break down ExxonMobil’s profit per day ($108.2 million), per hour ($4.5 million), per minute ($75,150) and per second ($1250). I can see the senators salivating upon seeing that data. I for one am embarrassed to have a small position in USA Today parent company Gannett (GCI).

The talk in Washington has started already, so has the legislation. One Senator from New York (we will not name her) suggested in the fall that big oil should be forced to pay a portion of their profits into a fund that would seek renewable sources of energy. Wow, what a great idea. Lets punish big oil, how dare they make 50 cents in net profit per dollar of sales. What’s that? Their net margins aren’t 50%; well surely 30% is still reflective of price gouging, and not fair to the consumer. Wait, they don’t earn 30% per dollar of sales? Well, doesn’t matter, 25% is still unfair. We could go on with this drivel, but we’ll stop here. Exxon Mobil’s 2006 net profit margin was 10.46%.

Yes, 10.46%. Thats about 1/3 of Microsoft’s profit margin. Less than chewing gum giant Wrigley’s 2005 net margin of 12.43%. Hey senator from New York, why don’t you go after Wrigley’s? That’s an obscene amount of profit relative to sales, and it’s to the detriment of gum chewers everywhere. Why not force Wrigley’s to pay into a fund that would seek alternative sources of stuff people can chew? We know, were getting ridiculous here. Gum isn’t imperative for survival, is not a huge cost to consumers, but hopefully you see our point.

We know that energy is a huge issue. But let’s not bite the hand that finds the energy for us. The hand that is taking all of the risk, the hand that has expended billions and billions in what is a highly capital intensive industry. We want them to find more oil; we want the technology to get better, to drill deeper, to extract oil from places where it was not possible 30 years ago. And yes, we want them to earn a profit.

Is it important to identify renewable sources of energy? To be less dependent on foreign oil? Absolutely. But Uncle Sam can’t do it, and should not even try. Sorry, Unc, your track record just is not that great in these matters. You have never shown the ability to effectively deploy capital. Leave it to the private sector. Through technology, companies can now efficiently extract oil from the Athabasca oil sands in Alberta. And our neighbors to the north have a lot of oil sands. Perhaps technology will get to the point that the vast amount of oil shale in Colorado and Utah can one day be utilized. Renewable sources? No, but may buy us some time to develop scalable, efficient renewables. We’re not sure corn is the answer.

In conclusion, we understand the ire this issue creates. We don’t like paying $3.00 a gallon either. But big oil is not the villain here.

*The author does not have a position in ExxonMobil (XOM), but does have a position in Gannett(GCI) and Wrigley (WWY). This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.


Josh4580 said...

laissez-faire....laissez faire
good post

Anonymous said...

I purchased my first share of Exxon when I was 12 years old. It has performed very well over the last 24 years. And I have always thought if there were one issue to purchase, Exxon would be my Buffett.

I thought the press was ruthless on the subject of (Exxon's former CEO) Raymond Lee's pension. He was worth every cent of the $.05 /share that was paid to him. For running the largest corporation in the world. Compared to some of the other highly renummerated, poorly executing CEOs, he was one of the best. I felt he treated the shareholders as owners--not chumps.
I wish I could say that for dozens of other companies I have owned shares in.

Anonymous said...

International oil companies control 6-7% of worldwide oil resrves. The National Oil companies of Saudi Arabia, Iran, Russia, Venezuela, etc. control 93-94% of the oil. Would love to see the newsmedia talk about their profits instead of limiting their disparaging comments to just Big Oil!

Anonymous said...

10k indicates XOM paid 100 billion in taxes in 2007. 2.5x their net income went to various governments. Politicos barking at and biting the hand that feeds them. so, what's new.

Anonymous said...

Bravo !!!!
Last time I checked XOM shares were available for purchase on the open market. As a matter of fact I bought some last week. If people think XOM is making too much money why don't they buy shares and donate the dividends they receive to poor people?

Anonymous said...

Thank you, thank you, thank you! It's very refreshing to hear someone actually speak in a level headed manner about the supposed "obsecen" profits of "big oil." I was thinking just the same thing while in the subway today. If making 10 cents on every dollar of sales is "gouging" then isn't nearly every profitable company in America guilty of gouging? If 10 cents per dollar isn't fair, then what is? 7.l5 cents? 5 cents? Should they not be allowed to make any money at all because cheap oil is a right, like freedom of speech or religeon? If a 10% margin is too much, then you need to be able to rationally derive a what a "fair" margin is. As a general rule, I consider the oil issue to be strong indicator as to whether one is capable of thinking rationally and objectively about political issues.